by Charles Blazer

Created on: April 22, 2008

The Power of 8.4%

So I recently bought a home and financed it with a fixed-rate 30-year mortgage. Along with the mortgage bill each month, I now get a whole new kind of spam in the mail: Offers from various middleman companies to auto-debit my bank account bi-weekly or weekly to pay my mortgage in smaller, more frequent installments - meant to correspond to the frequency of my paychecks. So instead of writing a check for $2400 once a month, they're offering to "make life easier" (for a small fee) by auto-debiting $1200 from my bank account every two weeks (or $600/week, whichever I prefer). This supposedly makes it easier for me to budget my life.

I don't have problems setting aside a "big" mortgage payment every month, so the "benefit" of smaller, more frequent payments did not appeal to me. But then the spammers made an intriguing claim... They claimed that by using their program, I'd pay off my mortgage about 5 years early! All told, it would save me over $100,000 in interest charges! Whoa!

"How is that possible!?" I wondered. Then I asked myself the much more frightening question, "Is it possible that a spammer might actually have a product that's useful and that I would actually want?" Indeed, if electrons can tunnel through impenetrable barriers, then I guess anything is possible...

There had to be a catch, and I was determined to find it. Could it be true... that if you pay your mortgage in more frequent, smaller chunks, that you'll have less interest charges, which, over 30 years, could reduce your overall cost by over 20%?

Well, I ran the numbers and the answer is..... No. It's not true. At best, you knock a month or so off your mortgage term, but nowhere close to 5 years.

So how can these companies claim to save me 5 years' worth of payments? ... Then it hit me. Duh! Like when my nephew asked me, "If a rooster lays an egg on the tip of a rooftop, which way will it fall?" I had overanalyzed the question and missed the obvious point... there are more than 4 weeks in a month! (and roosters don't lay eggs) So, by making half a mortgage payment every 2 weeks, you end up paying more toward your mortgage every month. When I ran those numbers, sure enough, I saw the mortgage term decrease by about 5 years.

Ah-ha! So I felt pretty good about myself, having figured out their scam. They collect their small fee ($1.50 per debit, if I recall) and homeowners think this is magically reducing their loan term at no extra cost, when, in fact, the homeowners are paying a

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